A Project by the State and Local Government Leadership Center, George Mason University Department of Public and International Affairs

Friday, October 19, 2012

Early Warning System

California Treasurer Bill
Lockyer reports the state is working on the development of an early warning
system to prevent more municipal bankruptcies through early detection of signs
of financial trouble. He compared the goal to stress testing, “where we try to
determine what are the right metrics to cause red flags, alarm, some form of
friendly discussions with experts, external advisers about what might be done
to avoid a potential crisis.’’ Stockton, San Bernardino, and Mammoth Lakes have
sought Chapter 9 protection, stoking investor concerns that more will follow as
finances worsen and bankruptcy’s stigma fades. Mr. Lockyer said he does not
expect the trend to continue: “I agree with those who have said probably not,
there may be some, not very many.” The early-detection system is a collaboration
among the treasurer’s office, the controller, the Legislature, and officials in
Los Angeles and San Diego, according to Mr. Lockyer. Lawmakers would have to
approve the plan. Analysts at the conference said they are taking a closer look
at the willingness of California cities to repay their debt in light of the
bankruptcies. “It is difficult to assess a city just based on the numbers,’’
said Melanie Tung, senior
municipal research analyst at Wells Capital Management. “Management, the
willingness and ability to pay – those are measurements that we have
looked at and are trying to examine more closely as we look at credits now in
this environment.” Treasurer Lockyer stated he did not believe California municipalities
are becoming less willing to repay their debt: “Just the opposite.’’ As per the
above, however, Moody’s and S&P appear to differ in their predictions of
further municipal bankruptcies in California. Gabriel Petek, an S&P analyst , said he does not anticipate a
“tsunami’’ of filings, noting the communities in bankruptcy are a fraction of
the 482 cities in the state: Of the 201 communities that S&P rates, he
noted: “we believe that those that are at most risk of encountering this level
of financial distress are already at the very low end of the rating spectrum.”
Moody’s, as per the above, seems more pessimistic.